WASHINGTON (TheStreet) -- One of the most important tasks before the 112th Congress will be rewriting the rules of the American dream. Since Fannie Mae and Freddie Mac were seized by the federal government in September 2008, lawmakers, with a few exceptions, have remained surprisingly mum about what will become of them. The Obama administration has promised to deliver a plan for the future of housing finance a few times, but ultimately put it off until next year. Restructuring Fannie and Freddie in any meaningful way would have been difficult enough when one party dominated Capitol Hill. Now, with polls predicting that Republicans will at least split the legislative branch -- if not take it over outright -- it may be completely impossible to restructure the government-sponsored entities. "Will the pace of GSE reform speed up or slow down, depending upon the results of November 2?" asks HSH Associates, a mortgage-data firm, in a recent blog post. "Our guess is neither; even then, once they do, our suspicion is that only minor reforms will come, with substantial reform possibly kicked past the 2012 presidential election." When asked what the mortgage industry wants out of Tuesday's election, HSH Vice President Keith Gumbinger offered a common refrain: Clarity. Liberals tend to favor a system that keeps the government deeply involved in the mortgage market, with the goal of expanding homeownership for disadvantaged Americans. Conservatives want the government to exit mortgage-finance completely, leaving it all up to the market to decide. The first option would keep mortgage credit flowing freely, and probably make it more available. But it would also retain the "moral hazard" element in which taxpayers are forced to foot the bill when things go bad. The second option would restrict credit, excessively for some parts of society, whether low-income families or minorities. While taxpayers, economists and op-ed columnists can debate the pros and cons of either system endlessly, the mortgage market just wants to know the rules of the game: How can it make money, and how much? "Before, money was made by Fannie, money was made by Freddie, money was made by banks, money was made by investors, money was made by brokers," says Gumbinger. "Now, people are just selling mortgages to Fannie and Freddie as quickly as they can before the rules change on them. They're saying to the government, 'Until I know to what extent you're going to be in the game, I don't know if there's a game to play." A statistic in an April report for the Financial Crisis Inquiry Committee illustrates Gumbinger's point very clearly. During the boom years for subprime-loan origination, Fannie and Freddie's share of new-mortgage origination dropped to 37% from 57% in a matter of just two years. As all that was going on, shareholders pushed the two GSEs to move deeper into subprime for profits. Congress did the same to extend more home loans to their constituents. (Some, including outgoing Senate Banking Committee Chairman Chris Dodd (D., Conn.) and Kent Conrad (D., N.D.) even received apparently favorable mortgage loans from Countrywide CEO Angelo Mozilo under his special program called "Friends of Angelo." Mozilo and two other executives agreed last month to pay a record fine to settle fraud and insider-trading allegations with the Securities and Exchange Commission.) The subprime crisis is what got Fannie and Freddie into trouble. But by 2009, with taxpayers' backing, the two firms once again represented a majority-- more than three-quarters -- of new mortgage business; they now represent nearly as much of the entire mortgage market. The difference in market share isn't chump change: Mortgages represented $12 trillion in value in September 2008. It's a number that's dwindled in the intervening time but has not evaporated. Mortgages will be a big question for Congress next year. The Treasury Department hosted an event on the future of mortgage finance in August. Treasury Secretary Timothy Geithner has promised that he will provide the administration's comprehensive strategy in January. The Federal Deposit Insurance Corp. and Federal Reserve co-sponsored an event last month to discuss the issue as well. But if financial-reform proceedings proved anything, it's that ideas that come from the president and regulators may help move the process along, but they don't write the law. There's little chance that Republicans will let Fannie and Freddie continue to exist in their current forms. There may be less of a chance that President Obama will sign into law anything similar to what his one-time presidential opponent, John McCain (R., Ariz.) proposed earlier this year. "Obama seems resolute in pushing his agenda," says James Lothian, a finance professor at Fordham University. "Republicans will resist and many of the Democrats who survive what looks to be an out-and-out bloodbath will think twice about following the Obama party line." So what will happen to the mortgage market? Right now it seems to be humming along just fine - at least in terms of new originations and refinancing. Banks have shored up their lax underwriting policies, leaving few loans that wouldn't fit into Fannie and Freddie's new-and-improved standards. A couple of private issues have moved forward, too, but only because they were made of high-quality "jumbo" mortgages issued to wealthy individuals. Though the private issuance stoked talk of a resurgence of mortgage-finance capitalism -- breaking away from the boring, bland, plain-vanilla, GSE stuff -- no such thing has occurred. "Last year, at this time, the administration said by January or February they'd have a proposal for Fannie and Freddie," says Gumbinger. "Then they kicked it down the road 'til the summer. Then after the elections. Fannie and Freddie have been wards of the state for two years now. There's no clarity. There's no clarity or resolution or open debate." Back in the 1950s, when Americans first began moving out to the suburbs and creating new ones, it wasn't rare to pay 20% of a home loan upfront. That standard was an anomaly only a few years ago, but has returned with force. More than 30% of home sales last quarter came from foreclosure auctions, many of which were rock-bottom, all-cash deals with no debt involved at all.
The new Congress that takes its seat in January may not be counted among the Friends of Angelo -- and clearly that's a good thing. But it will also have to decide whether Americans get mortgage loans in the cheap-and-easy fashion of the modern age or go back to the responsible, old-time manner of taking on massive debt. Or, perhaps, Congress will favor an entirely new type of policy
, one that's been favored by overseas economies for hundreds of years. In some sense, the mortgage market doesn't really care. As Gumbinger puts it, "They just want to know, 'Can I make money in this business anymore?'" Over the summer, Jay Diamond, managing director of Annaly Capital Management (NLY) evoked a similar idea
: "I don't know what the answer is to GSE reform," he said. "What's your policy objective? The market will adapt to any change." -- Written by Lauren Tara LaCapra in New York
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